CIBC re-enters market as issuer with $3.25 million notes linked to S&P 500 sold by Wells Fargo

By Emma Trincal

New York, Jan. 31 - Canadian Imperial Bank of Commerce priced $3.25 million of 0% growth securities with leveraged upside participation to a cap and fixed percentage buffered downside due Aug. 4, 2014 linked to the S&P 500 index, a deal that caught the attention of the market as it marked the return of an issuer that had been gone since 2006, according to data compiled by Prospect News.

Wells Fargo Securities, LLC was the agent.

The 18-month notes offered two-time leverage with a 12.3% cap, or about 9% per year. The downside was partially protected by a 10% buffer.

"It's very interesting. Wells Fargo has used other issuers in the past. I guess they do want credit diversification. It's probably for internal distribution at Wells Fargo. CIBC is a Canadian name. It's a fairly good credit," a structurer said.

"Investors like Canadian names a lot. It's perceived that Canadian banks have gone through the crisis in a fairly good shape. So there's definitely demand for Canadian banks as issuers."

CIBC was last seen in the market as an issuer in 2006, according to data compiled by Prospect News. At the time, the bank was issuing a small offering approximately each month.

"It's always good to see a new issuer, and this one is well-rated," said Steve Doucette, financial adviser at Proctor Financial.

"Sometimes investors have to give up a little bit on the terms to get the better credit. But credit risk is the biggest issue. It should be the first item on the list."

CIBC has an A+ rating with Standard & Poor's, the same as Bank of Montreal and Bank of Nova Scotia with this rating agency. Royal Bank of Canada is rated AA-.

Earlier in January, Moody's downgraded six Canadian banks including CIBC, which is now rated Aa3. But Canadian banks remain among the most creditworthy financial institutions in the world.

"CIBC has been working on their program for a while. This is their first one in a long time," a source said.

Making the deal

Market participants and sellsiders speculated about how the joint effort between CIBC and Wells Fargo came about.

"It's interesting to see them coming to the space," a sellsider said.

"It's probably built for Wells Fargo for distribution from their internal platform, Wells Fargo private wealth.

"Most likely it was just a connection. Wells Fargo probably wanted to use the credit.

"Sometimes a distributor, in this case, Wells Fargo, would go to a CIBC and tell them 'This is what I want. Do it.'

"Or that same distributor may go to a bank and ask them to handle the swaps, they just want to use the name and distribute the deal.

"Alternatively, you could have the issuer handling the swap themselves. It's their product and they find a distributor for it.

"There are a few different ways how the paper can move from where it's being underwritten to the Street."

The structurer speculated that Wells Fargo may have been "on the back end."

"It could work either way," he said.

"CIBC could have structured the product themselves. They could have retained the underlying hedge for the product and done it out of their own derivatives desk and turned to Wells Fargo for distribution. The issuer is doing everything and the distributor buys the product. I don't think Wells Fargo would do that.

"It's more likely that Wells Fargo would have come to CIBC and said 'We like your credit, could you issue something for us, we will provide the underlying hedge.'

"I think this is probably what happened: CIBC issued the notes, but Wells Fargo was on the back end.

"For the end clients, it doesn't matter, but it's interesting though for people in the industry."

The fee for the deal was 0.25% for $3.22 million.

"The fee is very low. My guess is that it was a high-net-worth client, probably not a retail client, because Wells Fargo tends to show principal-protected notes to their retail clients," the structurer said.

"It's probably a one-off, but I couldn't say for sure."

Sources said that they had no explanation for the reason why CIBC left the U.S. registered notes market seven years ago and came back now.

"It happens. All of the sudden an issuer disappears. Often it's because the treasury doesn't need to raise a lot of money. Even if structured notes aren't the main source of funding for banks, it has an impact. It can be a problem for people on the desk, eventually, squeezing the individuals out of the firm. It happened in the last year or two.

"Lending standards have changed so much; operations have gotten much tighter. We see that happening a lot. But sometimes things reverse to normal and the business comes back," the structurer said.

Several sources said that the teaming up of CIBC and Wells Fargo was a result of personal relationships.

"The folks at CIBC and the folks at Wells Fargo must have known each other or worked together before. That's usually how it works," a source said.

Bulls want more

Financial advisers said that while they liked the credit, they thought the cap was too low.

"If the market continues on this bullish momentum, investors could end up mildly upset if they're capped at 12% for a year-and-a-half," said Doucette.

"I'm not predicting what the market will be like. But the momentum could take us to the next level. It makes no rational sense, but it may be the irrational market behavior that takes us there. In that case, does it make sense to cap your upside at 9% per year? Why would you want to limit the possibilities?

"I would be willing to give up the leverage if I could raise the cap above that," he said.

Matt Medeiros, president and chief executive at the Institute for Wealth Management, also suggested a higher cap.

"I don't quite understand the two-times leverage with a 12.3% maximum return. It's a very low cap. If you're capping at such a low level, you might as well be long the index," he said.

"With this cap, I don't think the leverage will add value. The cap should be raised substantially," he said.

Realistic expectations

But the structurer said that advisers should understand that the notes are issued by a high-quality issuer, which cannot be compared to notes issued by lower-rated U.S. issuers.

"Yes the cap is not that high. That is Canadian paper, and Canadians' funding is not good because it's good credit. You have to expect slightly different terms. You're not going to get the same terms with a Canadian bank than you would with Morgan Stanley," he said.

"It's not a high cap, but you have 10% downside protection on the S&P. The S&P is not a volatile index. Right now the historical volatility is at 12%, so a 10% buffer is quite high.

"Advisers are a little bit spoiled. They're mixing apples and oranges.

"A 10% buffer, that's a lot on the S&P. And it's not a barrier.

"If you were to get rid of the leverage, you wouldn't get that much more of a cap. Maybe you could raise it from 12% to 14%, but certainly not more, in no way you would get 16%. You would have to get rid of the buffer in order to get a significantly higher cap."

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